The Manchinations of Senator Joe

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Hello and welcome to Trade Secrets. It’s not my usual practice to dedicate an edition of the newsletter to a single member of the US Congress. But the outsize role in American industrial, climate and trade policy played by Joe Manchin, the Democrat from West Virginia who last week announced he would stand down from the Senate next year, tells you a lot about why the US does what it does. Charted waters is on the impact of Chinese car exports on the German automobile industry.

Cutting carbon the American way

When President Joe Biden’s Inflation Reduction Act (IRA) unexpectedly arose last summer from the ashes of the Build Back Better bill, which stalled in 2021, the critical vote in a divided Senate was that of Joe Manchin. A supposedly fiscally conservative Democratic senator in a coal-mining state that has twice backed Donald Trump by about 40 points in presidential elections, Manchin was persuaded by a carefully constructed mix of spending and tax credits to vote for a green investment splurge whose estimated cost is now more than $1tn and rising.

The IRA has redefined America’s (and the world’s) green transition and its trade relations, particularly with the EU. The IRA has generally been welcomed by Brussels and indeed induced some serious spending envy. But the trade-distorting aspects needed to get it through Congress — especially the now-notorious domestic content rules for electric vehicle tax credits — got them alarmed.

More generally, the US doing its green transition through shelling out government money rather than pricing carbon has bumped uncomfortably up against the EU’s rules-based approach. Manchin’s political positioning embodies that inclination. In 2010, when Barack Obama was trying to push a Cap and Trade bill through Congress, Manchin aired one of the more entertainingly bonkers campaign advertisements in US political history, showing his twin contempt for gun control and carbon pricing by hanging up a copy of the bill in some West Virginia woods and shooting it with a hunting rifle.

This strong aversion to domestic carbon taxes even in the political centre is a particularly US phenomenon. There’s some pushback against the net zero targets in Europe by centre-right political parties, but no government is seriously talking about dismantling the emissions trading scheme that’s the centrepiece of EU carbon reduction policy.

In the US, support for transitioning away from carbon had to be much more carefully constructed, based on spending carrots rather than tax sticks. They also included tactical concessions on fossil fuels, whereby permits for a natural gas pipeline to West Virginia were part of the deal to get Manchin’s support for the IRA. (To be fair, there’s an interesting defence of this approach on principle from the US journalist Matthew Yglesias.)

The IRA frequently bears the imprint of Congress’s preferences, not those of the administration. When the predictable (and frankly somewhat overwrought) complaints came in from Europe about local content requirements for EV tax credits, the White House essentially shrugged and said it couldn’t reopen the bill that Congress had written. The US Treasury, which was in charge of the implementing legislation, contented itself instead with punching loopholes in the rules for the benefit of European, Japanese and Korean producers, which caused Manchin to threaten to block the whole thing.

Trade policy in the US at the moment often looks like an adjunct or afterthought to (and sometimes collateral damage from) domestic industrial policy. One of the more entertaining episodes of the EV tax credit saga was Manchin revealing he had wrongly thought that the EU had a trade deal with the US and its companies could therefore benefit from tax credits for critical minerals used in EV batteries on that basis.

Assuming that was true and not said for effect, it’s a strikingly badly informed way to make trade policy. Manchin is very far away from being a hero to internationalists and progressives. His resignation statement suggested he was canvassing support for running as a third-party presidential candidate next year to the right of Biden. A spending programme constructed to attract his support has, however, managed to get the US to put serious amounts of money and effort behind the campaign against carbon emissions for the first time.

The aimless drift of trade on the Hill

To be frank, it’s not as if the rest of Congress seems to have much idea what it wants from trade policy either, on the Republican or the Democratic side. Traditional preferential trade deals are off the table for the foreseeable, as is the trade promotion authority that would be necessary to vote them through.

Given that the Republican presidential candidate is highly likely to be Donald Trump, with his eccentrically aggressive protectionism, it’s not as if those Republican lawmakers who still quaintly support trade deals can prepare plans for when their party retakes the White House.

The thing that mainly seems to make Congress mad at the moment is not being consulted, or indeed given a veto, over the various agreements the US is proposing with trading partners including the Indo-Pacific Economic Framework. Given there’s almost no substance in deals such as the IPEF, it is pretty clear that this is a fairly meaningless exercise in congressional chest-thumping. Congress also failed to do much to stop Trump’s various destructive trade initiatives. Manchin might have a disturbingly casual attitude to US trade policy, but the rest of Capitol Hill isn’t much more impressive.

Charted waters

It’s happening. China’s shift towards being a net exporter of cars, with all that implies for trade tensions with Europe and other rich economies, is clearly under way.

Losing lower-value-added manufacturing jobs to Chinese competition is one thing, but there will be serious ructions if there’s a perception that imports from China (and particularly from Chinese-owned companies) are hollowing out Germany’s precious car industry.

Trade links

A terrific in-depth look by FT colleagues at how shadowy trading networks evade EU export controls to smuggle European microchips into Russia.

In other economic security news, the US is trying to thwart Russia’s intention to become a big exporter of liquefied natural gas.

More debt restructuring problems for Zambia, with the IMF and other official lenders worrying about the deal the country has struck with private sector lenders.

The FT’s Britain After Brexit newsletter describes UK business and trade secretary Kemi Badenoch’s weak attempts to argue that Brexit has not been bad for British trade.

The political toxicity of anything involving China in the US has been underlined by a dispute about tax breaks for a massive China-owned battery plant in Michigan.

Trade Secrets is edited by Jonathan Moules